2.1.1.3. Right to Receive Dividends
A dividend is the payment of a portion of a company’s earnings to its shareholders. Payments usually are made in cash as a fixed amount of money per share, or as additional shares of stock. Corporations are not obligated to issue dividends, so common stockholders may or may not receive them. If a company does decide to issue dividends to common stockholders, stockholders will receive a dividend for each share that they own. Older, more-established companies tend to pay dividends; newer companies are less likely to do so. When issued, dividends are paid out of a corporation’s after-tax earnings—most often quarterly.
When a company announces its decision to offer a dividend, it stipulates the date on which the dividend will be paid and the date by which an investor must own the stock to be eligible to receive the dividend. The date of the announcement is called the declaration date. The date of payment is called the payable date. The date by which an investor must own the stock (that is, the investor must be the owner of record) to receive the dividend is called the record date. The company sets the record date and may set it several days or weeks before the payable date.
Another critical date, the ex-date, or ex-dividend date, helps to determine which investor receives the dividend: the buyer or the seller. The ex-date occurs one business day prior to the record date. The seller receives the dividend on transactions that occur on the ex-date or after. The buyer receives the dividend on transactions that occur before the ex-date. The reason for this is that a buyer only becomes the owner of the security on the settlement date. Settlement refers to the process whereby a security is paid for and transferred to a new owner. The settlement date for most securities is two business days after the trade date. This is abbreviated by T + 2. In order for the transaction to settle by the record date, the security has to